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Tyson Foods Positioned to Fly

NEW YORK (TheStreet) -- One of the more fascinating aspects in corporate China is that business relationships are created and reinforced over food and drink. When I frequented there for business, I never missed an opportunity to take advantage of mealtime to strengthen my connections. Besides, eating out in China is a sensational experience, unlike most restaurants in America, in my opinion.

For example, many seafood restaurants (my usual choice when asked) in China have a giant aquarium feel to them. After entering and settling on a table, you usually walk to a large area with dozens and often a hundred or more tanks surrounding tables in the middle, all with various sea creatures on display.

As you transverse the offerings, an order taker writes down your selections, which are in turn caught, cooked and served. It just doesn't get any fresher than straight out of the tank, and it's quite the spectacle the first time. The fish inspection is a mere formality, but demonstrates the importance and concern for food quality. Some restaurants even display ducks, chickens and rabbits in small cages for the same reason.

Live animals don't fit well in the business models of Yum! Brands(YUM - Get Report), McDonald's(MCD) and Wal-Mart(WMT) and their need for high-quality, low-cost food sources. As the middle-class grows in size each day, so does the demand for high-quality, safe foods. Yum! Brands KFC recently reported weak sales after concerns of illness drove customers away. In order to achieve the revenue actually received, KFC needed expensive promotional discounts to drive traffic.

Typically, Tyson avoids the risk with operating farms and focuses on processing; however, in China, the competitive advantage comes from owning the entire supply chain and exploiting the brand to achieve higher product revenue and earnings. Large retailers (cooked and unprepared) can't afford to have their names tarnished over reports of poor quality.

This is a perfect example of when quality costs less, and Tyson Foods is positioning itself as the go-to brand in China. Tyson's investments should begin paying off late 2014, but because the market is forward-looking, expect relative improvements in guidance to payoff in the first half of next year.

Tyson has a relatively low forward-earnings multiple of 11.6, a 7% quarterly revenue growth year-over-year, and an even more impressive quarterly earnings growth rate (although on a small basis) year over year.

The bear thesis isn't without merit, and short sellers aren't buying into the Tyson success story for 2014. Over 10% of the float is shorted. I think the shorts have this one wrong, and 2014 will see an acceleration of share appreciation when expected revenue and earnings from corporate-owned farms have greater influence on management guidance.

Investors are overly pessimistic after a difficult and challenging downturn from the financial crisis. Tyson is recovering and increased its dividend by more than 50% last month. The top-line gross profit and bottom-line net earnings per share (diluted) have surprised many and should have short-sellers worried.

If we estimate the 2015 first-quarter earnings per share at 85 cents and use a forward earnings multiple of 16 (concurrent with the present trailing multiple), we can reasonably envision a one-year price target of $54.40. With that said, I think significant gains will be realized in the second and third quarter of 2014, because increasing guidance makes the play obvious to everyone.

The first farms are expected to become operational in late 2014. As we get closer to the date of production, TSN will increasingly be able to add revenue and earnings into guidance with greater confidence (contracts and commitments can be made as the start date approaches). In other words, we won't have to wait until they actually are producing for management to highlight them (or for investors to take notice).

The whole thing is a big deal because the supply chain is so fragmented and so many farmers are willing to cut corners. If Tyson executes well, it will own the premium market.

At the time of publication, Weinstein had no positions in securities mentioned.

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